EUR 850.00 For Business Accounts Only

Morningstar | While Revenue Growth Is Impressive, a Few More Quarters Will Be Necessary to See Margin Expansion

We have a mixed impression of Panasonic’s June quarter earnings. On the positive side, its revenue grew 7.7% from the previous year, which is the highest growth rate over the past decade, if excluding the impact of mergers and acquisitions, or M&A, and currencies. Panasonic has been working for years to expand its overseas business and B2B business, as it had been struggling from the lower growth and intense competition of the domestic consumer electronics market, and so we are encouraged by the progress of its business transformation. On the negative side, we are somewhat disappointed that its operating margin was lower than expected. In particular, while revenue from the automotive and industrial systems segment increased 12% from the previous year, its operating margin dropped to 2.1% from 2.8% because of the increasing ramp-up cost of infotainment systems and rechargeable batteries. Therefore, we think the market is still skeptical as to whether the company can improve its profitability on the expanding automotive businesses. We thus believe that margin expansion in the second half is not embedded in the current share price, and that shares are currently undervalued. We retain our fair value estimate of JPY 2,000, as well as our no-moat rating.

While increasing material costs dragged down the operating margin of the appliances segment, and production-related costs for rechargeable batteries depressed that of the automotive and industrial systems segment, we forecast that the company will improve profitability from the second half of this fiscal year. Most material costs are now declining after hitting their peak in the spring, which should help improve the gross margin. Additionally, if Tesla can achieve its plan of building 55,000 Model 3s in the September quarter, Panasonic will be able to earn substantial profit, in our view. Therefore, we will retain our operating income forecast of JPY 445 billion for this fiscal year, which is 5% above guidance.